Dubai Gold & Commodities Exchange Weekly Market Views - June 20, 2010

Please note that the observations and views expressed in this newsletter do not reflect the views of DGCX and are solely the view of the writer (CPM Group).

WTI oil prices could continue to trade in a choppy fashion this week, between $73 and $79. Investors who had been concerned about oil’s near-term fundamentals may have largely exited the market. Another pronounced wave of long liquidation is not expected. However, higher prices may be averted by profit-taking with economic growth in the world’s major economies expected to cool during the second half of 2010. Although supplies are ample to meet current demand levels, the longer term effect of the Deepwater Horizon disaster is likely to exacerbate delays in bringing oil production on stream and could be the precursor to pushing prices sustainably above $100 over the next five years. The International Energy Agency estimated that global offshore oil production could be reduced by 800,000 – 900,000 barrels per day by 2015 if there was an extended moratorium on new drilling activity worldwide, similar to the policies currently in place in the Gulf of Mexico.

Silver prices may test $20.00 this week. Prices have not been able to break above this resistance level since March 2008, however, the potential for a move higher is possible given the recent surge in investor buying. The next resistance level to be tested may be $22.00. Unease over financial markets and economic conditions over the past couple of months has fueled investor interest in silver due to its financial traits, in particular its safe haven quality. A round of profit-taking could push silver back toward $18.00, but investor and industrial buying should be expected if prices do head lower. Relatively low prices have drawn increased buying interest over the past few weeks. The contract roll in the futures market in New York may provide additional support to silver prices over the next two weeks. Combined exchange traded fund silver holdings remain at elevated levels, totaling 476.15 million ounces as of 17 June.

The rupee may break above 218 cents per 100 rupees this week, but could be capped at 220 cents. The rupee moved to trade above 216 cents on 17 June, the strongest level since 20 May. Investor sentiment toward financial markets improved over the past week. On 18 June foreign investors purchased a net 5.44 billion rupees of equities, marking the sixth consecutive day of positive capital inflows into Indian equity markets, according to the Securities and Exchange Board of India. The rupee will be vulnerable to a reversal of market sentiment, but could hold above 216 cents. Inflation meanwhile remains a concern, which rose to 10.2% in May year-on-year from 9.6% in April. The Reserve Bank of India is unlikely to tighten its monetary policy in the near term, however, given current shaky financial market and economic conditions around the world.

The pound may trade on either side of $1.48 this week. The pound consolidated around this level for most of last week. The United Kingdom’s consumer price index fell 3.4% in May year-on-year from 3.7% in April. Concern had grown over rising inflationary pressures, but the latest figures support the Bank of England’s stance to maintain its loose monetary policy. A budget outlining spending cuts for the United Kingdom is scheduled for release this week. If investors perceive the budget to be able to draw down the United Kingdom’s fiscal deficit without greatly hindering economic growth, the pound may head toward $1.50. If the budget fails to allay investor concerns, however, the pound may move to test support levels, possibly heading back toward $1.45.

The yen may trade between 109 cents and 111 cents this week. The yen traded around 109 cents early last week, but moved above 110 cents by Thursday. Concerns over euro zone sovereign debt and deficit problems eased over the past week, but investors continue to hold on to their safe haven investments. The yen also is receiving support from recovering domestic equity markets and initial confidence in the Japanese government’s new administration. The administration of Naoto Kan, the Prime Minister, is targeting an average economic expansion of 3.0% per year for the next ten years. It also aims to address deflationary pressures by spurring domestic demand. Many other areas to stimulate economic activity are being focused on. The yen is likely to be supported in the near term.